NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned an 'A' rating to the following revenue bonds
issued by the Maryland Health and Higher Educational Facilities
Authority on behalf of University of Maryland Medical System (UMMS).

--$151,050,000 series 2017B (Tax-Exempt);

--$122,365,000 series 2017C (Taxable).

In addition, Fitch affirms the rating on UMMS's $1.2 billion outstanding
debt including the series 2005 and 2010 bonds to be refunded; Fitch does
not rate the series 1991B bonds.

The Rating Outlook is revised to Negative from Stable.

SECURITY

Debt payments are secured by a pledge of the gross revenues of the
obligated group.

KEY RATING DRIVERS

POTENTIAL ACQUISITION OF DIMENSIONS HEALTHCARE SYSTEM: UMMS, Prince
George County (County) and Dimensions Healthcare System (Dimensions)
entered in a revised MOU in August 2016 that paves the way for UMMS to
become the sole corporate member of the Dimensions. The proposed
transformation project includes construction of a replacement hospital
for the Dimensions Cheverly campus and scaling back of inpatient care at
one other Dimensions facilities at a total cost of $645.5 million. The
proposed project will receive significant capital commitments from both
the State of Maryland and the County and will require UMMS to make a
capital commitment for the project.

REVISION OF THE OUTLOOK TO NEGATIVE: The Negative Outlook reflects the
expected execution of a Definitive Agreement and acquisition of
Dimensions by UMMS, as well as the potential impact on UMMS financial
profile. The timing, size and security structure of any potential UMMS
debt issuance in support of the Dimensions transformation has not been
finalized at this time and as such cannot be fully incorporated into
Fitch's analysis.

GROWING REGIONAL FOOTPRINT: UMMS has been strengthening its regional
presence through affiliations with community hospitals and driving
tertiary business to its flagship facility, University of Maryland
Medical Center (UMMC). UMMS maintains the leading market position within
the state of Maryland with a market share of 25.5% in the PSA, compared
to 19.9% for Johns Hopkins and 14.9% for MedStar.

FACING MARGIN PRESSURE: Operating performance has been relatively stable
over the last three years despite challenges related to integrating new
hospitals into the system. UMMS generated operating income of $87.2
million in fiscal 206 (year-end June 30), ahead of budget, translating
to operating and operating EBITDA margins of 2.4% and 9.4%,
respectively. The first quarter of fiscal 2017 ended with a small
operating loss of $0.6 million, which includes a one-time expense
related to a termination of a defined benefit pension plan at one of the
facilities. Excluding the one-time expense operating income was $20.1
million, equal to an operating margin of 2.1%. The attainment of
projected margins averaging 2% over the next five years will require
implementation of a performance improvement plan totaling $1 billion
during this period.

WEAK LIQUIDITY: While liquidity is weak for the rating category and is
not expected to improve materially given the system's future capital
needs, metrics have remained. Absolute liquidity has been slowly
improving over the last several years but liquidity metrics improvement
is limited by increase in system expenses as the organization expanded -
consolidated system revenues increased by 21% since 2014. Unrestricted
cash and investments at Sept. 30, 2016 of $1.2 billion translating to
122.2 days cash on hand (DCOH), 12.5x cushion ratio and 68.6%
cash-to-debt, all trail the respective 'A' category medians of 125 DCOH,
19.4x and 148.6%. UMMS liquidity is also negatively impacted by a large
swap portfolio, requiring collateral posting of $170.9 million at Sept.
30, 2016. Given capital plans on the horizon, liquidity is likely to
remain stressed, but expected to remain fairly close to historical
levels.

ELEVATED DEBT BURDEN AND ROBUST CAPITAL NEEDS: UMMS debt burden is still
elevated but has moderated over time. Historical coverage of pro-forma
maximum annual debt service (MADS) by EBITDA was 3.4x in fiscal 2016,
lower than Fitch's 'A' category median of 4.5x, but MADS as percent of
revenues has declined to 2.7%, consistent with the category median.
However, the system has significant capital needs over the next five
years, requiring debt issuance of approximately $286 million in fiscal
2018, not including any potential debt issuance in support of
Dimensions, which may be as early as summer 2017.

RATING SENSITIVITIES

NEED TO IMPLEMENT A $1 BILLION PERFORMANCE IMPROVEMENT: Fitch expects
University of Maryland Medical System to execute its goal of generating
operating margins averaging 2% over the medium term needed to support
its capital and programmatic investments. Failure to generate adequate
cash-flow to maintain positive margins in absence of moderating its
capital spending would produce downward rating pressure.

RISKS IN ACQUISITION OF DIMENSIONS HEALTH: While the impact of the
potential acquisition and funding of the Dimensions Health
transformation strategy is not fully reflected in the rating, the
increased risk associated with the acquisition, operation and execution
of a replacement hospital for Dimensions is likely to result in negative
action. Fitch will evaluate the impact of the acquisition once the
Definitive Agreement is signed and debt plans are solidified.

NEW ISSUE DETAILS

The series 2017B fixed-rate tax exempt bonds and the series 2017C
fixed-rate taxable bonds are expected to be sold via negotiation the
week of Jan. 16, 2017. The transaction will refinance or refund the
outstanding series 1991B (not rated by Fitch) and series 2005 and 2010
bond series. Sources of funds include release of all or portion of the
debt service reserve funds (DSRF) of the series 1991B and the series
2010 bonds. DSRF's will not be funded in connection with the 2017
series. Final maturity of the bonds is in July 2039 and MADS, provided
by the underwriters of $100.7 million occurs in 2021. Net present value
savings are currently estimated at $8.2 million. Additionally, the
transaction will enable the elimination of a 63% debt to capitalization
covenant.

CREDIT PROFILE

UMMS is comprised of the flagship facility, University of Maryland
Medical Center (UMMC) located in Baltimore, Maryland, and several
community and specialty hospitals. UMMS leverages its strong
relationship with the state and University of Maryland's School of
Medicine (SOM), which is a key differentiating factor compared to UMMS's
competitors. The state continues to provide UMMS operating as well as
capital support and UMMS is aligned with the SOM, which trains 50%-60%
of the physicians in the state. Fitch reviews the consolidated system,
which generated total operating revenues of $3.67 billion in fiscal
2016. The obligated group accounted for 95.3% of consolidated system
assets and 90% of consolidated system revenues in fiscal 2016.

Essential Provider in Maryland

Once a state-owned institution, UMMS continues to benefit from its close
ties to the State of Maryland (general obligation bonds rated 'AAA') as
an essential provider of certain high-end services, including the
state's largest trauma center. UMMS has been receiving ongoing operating
support of approximately $3 million annually for the Shock Trauma Center
as well as $32.2 million for certain capital projects over the last four
years. For fiscal 2017, the state will provide capital support of $25.3
million, with $20 million specifically dedicated for upgrading of UMMS's
NICU and labor and delivery areas.

UMMS' strong relationship with the University of Maryland's (rated
'AA+') SOM enhances its ability to reduce costs and increase revenue as
the faculty at SOM (approximately 1,200 physicians) is the medical staff
at UMMC. Further, UMMC's ability to provide high end services is
evidenced by a Medicare case mix index of 2.34 that results in a large
volume of referrals throughout the state.

Maryland Global Budget Revenue Program

Effective Jan. 1, 2014, UMMS signed onto the Maryland GBR program, which
now accounts for majority of total system revenues. Currently under a
five-year pilot period, the GBR program offers participants a fixed
revenue stream designed to incentivize hospitals to avoid unnecessary
care and provide care in the most appropriate cost setting. The amount
of hospital revenue is known before the start of the fiscal year and is
adjusted annually. The per capita growth rate of total GBR payments is
capped at 3.58% annually for the first three years. With continued
implementation, less complex services are expected to migrate to more
cost effective outpatient settings from the main campus. Strategies are
under development to improve physician alignment, which will be one of
the key drivers of success in managing populations. Additionally, as
part of its population health management strategy, UMMS acquired
Riverside Health Plan, which has 35,000 Medicaid managed care enrollees.

Need to Maintain Profitability

UMMS revenue base continues to diversify and grow, with operating
revenues totaling over $3.7 billion in fiscal 2016 compared to $2.4
billion in fiscal 2012. The system reported two fiscal years with solid
operating income - $117.7 million in 2015 and $87.2 million in 2016,
generating operating margin so 3.5% and 2.4%, respectively. Fitch notes
particularly the success of reversing the large operating losses at St.
Joseph Medical Center following its acquisition in 2012, which initially
pressured UMMS's profitability. The small operating loss reported for
the first quarter of 2017 is the result of a $20.7 million one-time
expense from the termination of a frozen defined benefit pension plan at
Upper Chesapeake Medical Center and a higher than budgeted medical loss
ratio at the Riverside Health Plan. UMMS has budgeted 2017 operating
income of $69.8 million (1.8% operating margin). The ability to generate
the projected margins will require performance improvement of $1 billion
over the next five years, with the biggest lift in the current fiscal
year. Failure to execute these financial improvement plan targets would
necessitate the need to delay or alter the capital plans.

Update on Dimensions Health System

UMMS, together with the University of Maryland and the State and Prince
George's County, has been a partner in the effort to address the
inadequate facilities operated by Dimensions. The current plan to which
both the County and State have committed themselves via legislation,
contemplates the construction of a replacement 231-bed hospital -
Regional Medical Center (RMC) at a more favorable new location outside
of the 495 beltway, as well as the transformation of the other two
campuses more focused on outpatient care. As conceived, RMC would become
more of a tertiary regional medical center. UMMS already operates
several programs at Dimensions, such as Level II Trauma and
cardio-thoracic surgery. The State and the County have each committed
$208 million of capital support for the project and $15 million each for
operating support in the initial years. A Definite Agreement is expected
to be signed in December 2016 and the County and State funding is
contingent on UMMS becoming the sole corporate member of Dimensions,
responsible for its governance and operations. Construction of the RMC
may start as early as summer of 2017.

Weak but Stable Liquidity

At Sept. 30, 2016, unrestricted cash and investments totaled $1.2
billion, equal to 122 DCOH, 12.2x cushion ratio, and 68.6% cash to debt,
weaker against the 'A' medians of 215 days, 19.4x and 148.8%,
respectively. Fitch notes that unrestricted cash and investments have
grown steadily over time, but the ability to grow liquidity is partly
limited within Maryland's rate setting system. Balance sheet weakness is
somewhat offset by the relative revenue stability and predictability
under the GBR model.

Robust Capital Plans

Management has projected $760 million of capital expenditures for next
five years roughly split between routine capital and IT needs and
approximately $780 million for strategic investments and projects. The
current projections envision issuance of close to $300 million in 2018.
This does not include any debt that UMMS may need to issue in support of
the Dimensions replacement hospital. While issuance of additional debt
could pressure the rating, management is committed to flex capital
expenditures based on debt capacity. Fitch would evaluate the impact of
any issuance against UMMS's financial profile once plans are solidified.

Elevated Debt Burden

MADS coverage by EBITDA of the pro forma MADS was 3.4x in fiscals 2016,
lower than Fitch's 'A' category median of 4.5x, but MADS as percent of
revenues has moderated to 2.7%, in line with the category median. Debt
to capitalization remains elevated at 55.5% compared to the 36% median.
The metrics do not include any assumption of the potential Dimensions
debt.

Debt Profile

At Sept. 30, 2016, UMMS's outstanding total debt including short term
debt, leases and draws on line of credit totaled approximately $1.8
billion, of which approximately 54% was fixed rate and the remaining
variable (swapped to fixed). Debt service is level until 2024 and then
declines slightly. Pro forma MADS of $100.7 million occurs in 2021.

Given market conditions, swap collateral posting requirements have been
sizeable and volatile. As of Sept. 30, 2016, UMMS was counter-party to
11 swap contracts with a total notional value of $776 million. The
aggregate market value of UMMS' swap portfolio was negative $268.7
million which required collateral posting of $170.9 million. UMMS draws
on its line of credit for these requirements, which Fitch includes in
total debt.

Disclosure

UMMS discloses annual financial statements within 120 days and quarter
unaudited financial statements within 45 days for the first three
quarters and within 90 days for the last quarter through the MSRB EMMA
website.

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